Further stimulus expected

US Politics
On Wednesday, US Congress formally confirmed the election of Joe Biden as 46th president of the United States despite the proceeding being interrupted by a mob that stormed the Capitol Building. Also, the second of two runoff elections in Georgia resulted in the Democrat candidates winning the two seats at stake. Both Jon Ossoff and Raphael Warnock led their opponents by more than the 0.5 percentage-point threshold for a recount.

US Economic data
The nonfarm jobs report for December showed the extent of the winter slowdown in the US economy, with 140,000 job losses compared with a monthly average gain of 1.5 million since April. The official unemployment rate remained unchanged at 6.7%. The December IHS Markit Manufacturing PMI rose to 57.1, its highest level since September 2014, whereas the equivalent services index slowed from 58.4 to 54.8. However, activity in both services and manufacturing remains well above the 50 level that separates expansion from contraction.

Europe economic data
The euro area unemployment rate declined in December, to 8.3% from 8.4% the previous month. Retail sales in the euro area contracted in November by -6.1% from the previous month, more than expected, reflecting tighter pandemic restrictions. The flash annual inflation rate for the euro area came in at -0.3% in December. The figure was unchanged from the previous month and was the sixth consecutive negative monthly reading. As in the US, December PMI readings showed manufacturing activity to be more buoyant than services.

Asia economic data
Latest PMI readings indicate that Chinese growth momentum probably eased in December. The Caixin (Markit) PMIs, which better capture the activity of smaller private enterprises, showed a decline from November data. However, the indicators remained comfortably within expansionary territory. PMIs in other Asian economies generally improved in December. PMI in Taiwan rose to its highest level in a decade. India PMIs remained high after rebounding as the economy continued to recover.

Rates
Last week, 10-year US Treasury rates traded above 1% and the yield curve continued steepening. The expectation of further fiscal stimulus pushed inflation expectations. The 10-year inflation breakeven rate reached 2.1%, a level not seen since 2018. The breakeven inflation rate represents a measure of expected inflation derived from 10-Year Treasury Constant Maturity Securities and 10-Year Treasury Inflation-Indexed Constant Maturity Securities. The latest value implies what market participants expect inflation to be in the next 10 years, on average. Yields on inflation-protected Treasuries (TIPS) barely moved and remain negative.

Equity markets
Over the week, cyclicals outperformed with Banks rallying +7.65%, Materials +6.7% and Energy +9.2%. The equal-weight version of the S&P 500 index gained +2.86% and the small-cap Russell 2000 surged +5.91%. European equites also gained with Banks rallying +6.01%. The Stoxx 600 ended the week +3.04% with +0.66% of that coming on Friday whilst the FTSE 100 rallied +6.39% on the week in the best ever start of the year for the index. The Q4 earnings reporting season will kick off on Friday January 15th in the US with the Bank sector as usual.

Oil surge
Saudi Arabia surprised markets by agreeing to voluntarily take some production offline, a decision that helped Brent prices soar roughly 5% on Tuesday. Saudi Arabia pledged to slash another 1m barrels per day (bpd) in production in February and March, while Russia and Kazakhstan said they would increase their output by a combined 75k bpd. Energy shares outperformed all other sectors and rose the most since late November on the news.

Delisting
Following an Executive Order issued by the White House late last year, the New York Stock Exchange (NYSE) announced on December 31st that it would begin the delisting process for three major Chinese telecom companies: China Telecom, China Mobile and China Unicom. The announcement led to a sharp selloff in these companies’ shares as investor offloaded their positions (Hong-Kong listed stocks of these companies also sold off). Then, on January 4th, the NYSE announced that after further consultation with relevant authorities, notably the Office of Foreign Assets Control (OFAC), it had determined it would no longer delist the stocks. On January 6th, the NYSE reversed course again, indicating that it would stick to the original plan to delist the three Chinese telecom stocks. On the same day, the OFAC published an updated list specifically naming the three companies, thus leaving little doubt they were covered by the Executive Order.